The Watchman On The Wall

Eph 6:12 For we wrestle not against flesh and blood, but against principalities, against powers, against the rulers of the darkness of this world, against spiritual wickedness in high places. Verse 13 Wherefore take unto you the whole armour of God, that ye may be able to withstand in the evil day, and having done all, to stand.

Friday, August 4, 2017

Why Does Venezuela Matter? ¿Por qué Venezuela importa?

Its arrival on July 23,
as Venezuela’s democracy slid into what may be its final crisis, underscores
the uneasy partnership that the American oil industry has entered with a nation
some fear is marching toward dictatorship.

From New Jersey down to
Texas, oil companies have come to depend on crude-soaked Venezuela to feed
their massive refineries. Last year alone, more than 270 million barrels worth
about $10 billion reached American shores -- enough to produce about 5
billion gallons of gasoline.

Now that vital flow could
be stanched if, as industry leaders fear, President Donald Trump’s
administration embargoes imports to pressure his Venezuelan counterpart,
Nicolas Maduro. The socialist autocrat’s allies on Thursday will begin
rewriting the constitution, pushing aside Venezuela’s democratic institutions.
The prospect of a U.S. response that cuts off crude has been particularly
unsettling for the likes of Chevron, Phillips 66 and Valero Energy Corp. which
have spent billions calibrating their plants to handle Venezuela’s
sludgy-but-abundant oil.

“The reason why Trump has
not hit back immediately is because there are lots of constituencies,"
foremost among them U.S. refiners and anyone who drives, said Sandy Fielden,
commodities research director at Morningstar Inc. in Chicago. “A lot of different
parties will be impacted."

The
U.S. on Monday froze any American assets owned by Maduro, a largely
symbolic move. White House officials have prepared a menu of possible additional sanctions, but are divided over whether to
restrict crude sales, according to a person familiar with the planning. The
person asked not to be identified discussing internal deliberations.

An
embargo on oil from Venezuela, the third biggest supplier to the U.S., could
force a slowdown in production at Gulf Coast refineries and at least a
temporary spike in gasoline prices. That could be sensitive for Trump,
who repeatedly attacked Barack
Obama over prices at the pump. “Gas prices are at crazy levels--fire Obama!” he
tweeted in 2012.

Refiners could turn to
suppliers of heavy crude from Canada to Mexico to Iraq, but the move would
ripple across global markets as other customers are shunted aside. It’s unclear
how quickly alternate sources like Canada’s oil sands, most of which already go
to the U.S., or Mexico, which is battling supply disruptions of its own, could
fill the gap.

U.S. refineries process a
third of all Venezuelan oil. Washington is weighing the “uncertain odds"
that a crude ban could unseat Maduro against “significant prospects of higher
feedstock costs and narrower margins for Gulf of Mexico refiners," Kevin
Book, managing director at researcher Clearview Energy Partners LLC, said in a
note to clients this week.

Venezuela Information
Minister Ernesto Villegas said in an interview in Caracas on Wednesday that
punishment will merely strengthen a president who already makes a bogeyman of
the U.S.

“If we get oil sanctions,
they are doing us a favor,” Villegas said. “Fuel will be more expensive in the
United States and Europe, and Nicolas Maduro will continue in Miraflores,” he
said, referring to the presidential palace.

Just how much a ban would
elevate prices depends on how quickly refiners could find replacements but the
impact is likely to be short-lived, said John Auers of Turner Mason & Co.,
a Dallas-based energy consultancy. Still, refiners would feel the pinch. Auers
estimated the industry has spent more than $50 billion in the past several
decades preparing plants for high-density, high-sulfur crude from Venezuela and
elsewhere.

Chevron, Valero and other
companies have lobbied the Trump administration for caution. The
American Fuel & Petrochemical Manufacturers, a trade group, argued in a
July 6 letter that sanctions could have “a significant negative effect on U.S.
refiners, consumers and our nation’s economy."

Bottom of Form

While companies have been
trimming Venezuelan imports for months, the nation is still a key supplier
for some of America’s biggest refineries. Last month, the country accounted for
a more than a quarter of capacity at Valero’s Port Arthur complex in Texas,
according to U.S. Customs data compiled by Bloomberg. It was 43 percent at
Chevron’s facility in Pascagoula, the Gulf Coast town where the Isle
of Man-flagged Paramount Helsinki unloaded.

With so
much at stake, a full embargo is probably near the bottom of the Trump
administration’s battle plan, said Clearview’s Book. The White House is more
likely to start with restrictions on the 100,000 barrels a day of lighter oil and other
petroleum products that Venezuela receives from the U.S. to bolster its
own dysfunctional refineries, he wrote.

If the U.S. later decides
to block Venezuelan imports, it could seek to blunt price impacts by releasing
oil from an emergency stockpile, the Strategic Petroleum Reserve. Those
supplies wouldn’t be a perfect match for refineries running heavy crude from
Venezuela, however.

The idea would be a
“short-term solution," said Joe McMonigle, a senior energy policy analyst
at HedgeEye Research and former chief of staff at the U.S. Energy Department.
“But I think the White House realizes the big potential impact here, so they’re
trying to come up with potential remedies."